RETURN

Meaning of Return

Dictionary

For an investor, no matter in which segment he invests his money, in the end it is the return that counts. This is not, or only rarely, identical to the interest rate. Depending on the respective capital investment, a wide variety of factors influence the return on the investment. In short, the return is determined from the interest rate in relation to the capital employed, reduced by costs, extended by other income.

  • For the determination of the return on a savings account, different principles apply than for the determination of the return on a condominium.
  • Fixed income securities are quoted at a market value. The interest rate is based on the nominal rate of 100 percent.
  • Buyers of a condominium are faced with a somewhat more complex task if they want to determine the return on their investment property.

Determining the rate of return

For the determination of the return on a savings account, different principles apply than for the determination of the return on a condominium. Basically, a distinction still has to be made between gross and net returns.

Determining the return on savings

For savings books and time deposits, the interest rate corresponds to the gross return. This still has to be reduced by the final withholding tax in order to determine the net return. With overnight money, the gross return increases compared to the interest rate if the bank honors the opening of a new account with a cash deposit. For all three types of investment, apart from the withholding tax, no other costs affect the return.

Determining the return on fixed income securities

Fixed income securities are quoted at a market value. The interest rate is based on the nominal rate of 100 percent. If an investor pays a price higher than 100 percent, the return on the paper is reduced because he has to see the interest rate in relation to the purchase price. If he buys a bond below 100 percent, this automatically increases the gross return. Over the year, however, this must still be adjusted for the costs of custody account management and brokerage fees for the purchase of securities as well as the withholding tax in order to determine the actual net return.

The calculation of the return on stocks

There are two approaches available to determine the return on stocks. On the one hand, the return that was achieved with a speculative transaction, and on the other hand, the return that results from the dividend payment. If an investor sells a share with a profit of 20 percent after six weeks, the gross return is 20 percent. If an investor buys a share for 50 euros and leaves it in the custody account, but receives an annual return of 2.50 euros, his dividend yield is five percent. In both cases, however, the return must be adjusted for the transaction costs, the proportionate custody account management fees and the withholding tax in order to determine the actual net return at the end of the year.

Determining the return on investment funds

The Association of German Investment Companies (BDI) has developed a uniform approach to make the returns on investment funds comparable. This takes into account all costs associated with fund management. However, there are individual deviations. Funds are charged with a front-end load. However, not every bank charges this in full, and some institutions do without it entirely. The calculation of the return on funds for both gross and net return is carried out in the same way as for stocks and bonds, but also takes into account the front-end load.

The rental yield

Buyers of a condominium are faced with a somewhat more complex task if they want to determine the return on their investment property. The rent in relation to the purchase price is a first clue. However, the adjustment also requires other factors. On the one hand, the financing interest plays a role, on the other hand, the non-apportionable ancillary costs that have to be deducted from the rent. The tax advantages are added to the accounting income. On the one hand, the interest reduces the taxable rental income; on the other hand, the depreciation on the property can be deducted from tax. From a tax point of view in particular, it is not possible to make a general statement about the return on a property, as this is very individual.

RETURN